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Friday, March 6, 2009

Putting Their Money On The Black Swan....And Making Lots of It

From Bloomberg

36 South Plans Inflation Hedge Fund After 236% Black Swan Gain By Netty Ismail

March 6 (Bloomberg) -- 36 South Investment Managers Ltd., a New Zealand-based hedge fund firm set up by derivatives traders, will close its Black Swan Fund after it gained 236 percent in the last 12 months and start a fund that wagers on inflation.

36 South will move to London from Auckland in May to boost its assets under management as investors have overlooked the manager because of its location, said Jerry Haworth, co-founder of the firm that manages more than $40 million.

“. ......

36 South buys long-dated options it considers cheap in global currency, fixed-income, equities and commodity markets, betting that rare and unforeseen events would generate unusually large profits. It doesn’t invest in options with less than a year to maturity.

Options, contracts to buy or sell shares by a certain date at a specific price, “serve as an early warning system for an impending crisis,” Haworth said. “It’s an amazingly lucrative niche and there are very few players in it.”

Making Money

The Black Swan Fund profited from bets on interest-rate cuts in Australia and New Zealand, and the purchase of put options on major stocks around the world, including the so- called BRIC nations of Brazil, Russia, India and China, Haworth said. The manager also bought put options on commodities. Put options gives the buyer the right, though not the obligation, to sell a specific quantity of a security by a set date. ....

“What can I say? They made a great deal of money,” said Peter Douglas, principal at Singapore-based hedge-fund consulting firm GFIA Pte, which runs a unit that invests in hedge funds. “We were invested in Black Swan, which made our clients happy. It was conceived and executed as a disaster hedge, and clearly last year was full of disasters.”

Black Swan

36 South plans to close its Black Swan Fund within the next two months and return the money to investors as options are now “very expensive” and are unlikely to produce “significant returns,” Haworth said.

Boy do I admire these guys for their integrity. They only managed $40 million a pittance in the hedge fund world. And at a point that they clearly could raise hundreds of millions and generate a fortune in fees, they are willing to close the fund based on their reading of market conditions.

“The market has gone from under-pricing risk to over- pricing it,” he said. “On a risk-reward point of view, I can’t put my hand on my heart to investors and say ‘listen, this is a good investment to be buying options at this juncture,’ because I don’t believe it.”

The fund, named after a theory developed by Nassim Nicholas Taleb, a professor of risk engineering at New York University, sought to protect client investments against “black swans,” those highly improbable events that can cause havoc. Taleb wrote a book called “Black Swan: The Impact of the Highly Improbable,” published in May 2007.

36 South will start a fund in the second half of the year that will return “well over 100 percent” if there’s “significant” inflation worldwide, Haworth said. Billionaire Warren Buffett said in his annual letter to Berkshire Hathaway Inc. shareholders Feb. 28 that U.S. bailouts will likely lead to “an onslaught of inflation”.

On and by the way, I don't think these guys based their strategy on the efficient markets hypothesis.

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